Reprinted below for your reference is a “Partnerships & Limited Liability Companies” e-bulletin dated April 26, 2018, for the California Lawyers Association, Business Law Section.
This may be of interest to anyone who has partnered up with other individuals on a business venture, then later formally incorporated their business.
Also note that in many instances, limited liability companies (LLCs) are organized to be treated as partnerships for federal (and many state) income tax purposes. Partnership tax status, though, might not be a major factor in non-tax matters or litigation; however, it could matter in some circumstances. To be sure, ask your legal and tax professionals how your situation could be affected if you have similar circumstances.
This litigation was in California state courts, but as is so often the case, California tends to be a trendsetter.
B.L.E. Fish, Inc. is a California corporation registered with the California Secretary of State (CASoS) in 2007.
It appears to me that these are the related cases in California’s 4th Appellate District Division 1:
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When do superseding events terminate an oral partnership? In a recent case, both a San Diego trial court and the Court of Appeals found that formation of a corporation can terminate a predecessor partnership and partnership fiduciary duties. In 2006, real estate agents Eng and Levy decided to purchase the Tin Fish Gaslamp restaurant in San Diego. Eng claimed that the agreement was an oral partnership. The offer was written and executed by B.L.E. Fish, which was incorporated the same month. The shareholders were Brown, Eng and Levy. A dispute arose over the operations of the restaurant and Eng alleged that Brown and Levy breached an oral partnership agreement wherein they agreed to a 10% management fee and set compensation. Specifically, Eng claimed Brown and Levy breached their fiduciary duties by charging a 20% property management fee and paying themselves excessive compensation. Brown and Levy argued that the formation of the corporation terminated the predecessor partnership and the associated partnership fiduciary duties.
Both the trial court and the Fourth Appellate Court of Appeals agreed concluding that the formation of the corporation superseded the prior oral partnership agreement. The opinion can be found at 2018 DJDAR 2685.
This e-bulletin was prepared by Phil Jelsma, Partner, CGS3.